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Credit Risk Insurance Overview

Credit Risk Insurance Overview. CREDIT RISK INSURANCE. What It Is and Is Not How Does It Help Underwriting Philosophies Policy Types Avoid Documentary Pitfalls Associated with Claim Perfection Benefits to Exporter and Foreign Buyer. Globalization. More Aggressive Sales Strategy

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Credit Risk Insurance Overview

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  1. Credit Risk Insurance Overview

  2. CREDIT RISK INSURANCE • What It Is and Is Not • How Does It Help • Underwriting Philosophies • Policy Types • Avoid Documentary Pitfalls Associated with Claim Perfection • Benefits to Exporter and Foreign Buyer

  3. Globalization • More Aggressive Sales Strategy • Higher Risk Emerging Markets • Financing – Key Purchasing Consideration • Increased Credit Exposures

  4. What is Credit Risk Insurance? Protection of A/R from 2 Default Triggers: • Commercial Default Insolvency; Devaluation or, Protracted Default • Political Default Transfer Risk; Arbitrary Government Action; Civil Unrest

  5. What It Is Not • A Tool to Make a Bad Credit Good (It renders a good credit acceptable in a high risk market)

  6. How Does Credit Risk Insurance Help? • Enhance Competitiveness • Enhance Financing Options • Enhance Protection Against Payment Default

  7. CREDIT RISK INSURANCE • Purpose: Expand sales, Improve financial options and mitigate payment risk • Exploit Payment Risk to Competitive Advantage • Covers: Commercial and /or Political Risks • Does Not Cover: Product disputes or contract cancellation • Conditional: Claim payment will be made only if insured can demonstrate conformity to the policy’s terms and conditions

  8. Who Uses Credit Insurance • Western Europe – 83% of World Market (Germany/26%, France/18%, U.K./13%) • Rest of World – 17% of which North America uses only 6%

  9. U.S. Firms Typically Insure • Finished Goods • Work in Progress • Buildings/Equipment • People

  10. Accounts Receivable Portfolio • A/R is your 2nd most fluid asset after cash • Timed Payment Obligations • Yet, > 94% of open account sales in US are uninsured

  11. POLICY TYPES Credit Risk Ins. • Short-termMulti-Buyer (or SingleBuyer) • Medium-term Single Buyer • Leasing (Operating or Financing) • Bank L/C

  12. STANDARD MULTI-BUYER POLICY • MultipleSales, Buyers, Countries • Short-term: 30 – 360 Days / 12-month period • Annual Deductible • Spread of Risk (all open account sales) • Premium Based on Risk/Exporter Experience • Ledger & Credit DCLs Available • Coverage: 90% to 100% • Assignable

  13. Short Term Single Buyer • Short-Term (30 - 360 Days) • 12 Month Policy Period • One or More Shipments • Premium Rate Schedule (Exim) • Negotiated Premiums (Private Sector) • Minimum Advance Premium Payments • No Deductibles / Assignable

  14. Medium Term Policy • Term: 1-7 years (Export-Import Bank) • 15% Down (Other Restrictions Apply) • Comprehensive Coverage • Focus is more on Foreign Buyer Obligation • Relatively Short Processing • Private Sector Programs Available (AIG, EIC, FCIA, Unistrat, Zurich)

  15. Evaluating an ApplicationMajor Items Needed • Financial Statements • Sales Volume - Domestic & Intl • Average A/R Balance • 3-year Loss History • Analysis of Credit Procedures • Financial Information on Top Tier Buyers - Financials, Bank & Trade References, Favorable Credit Agency Reports • Desired Credit Limits • For Export Programs, sales by country breakdown

  16. Pricing Based On • Country Risk • Industry Risk • Buyer Risk • Terms of Payment (the more liberal your terms, the less quality in your A/R – time increases uncertainty of payment ) • Loss Record • Deductible (losses/sales X projected sales)

  17. Benefits to Exporter • Enhance Overall Competitiveness • Contribute to Bottom Line • Improve Cash Flow • Reduce DSO • Lower Loss Reserves • Increase Collateral Base & Borrowing Power • Mitigate Chances of Payment Default • And, Premiums are Tax Deductible

  18. Benefits to Foreign Buyer • L/C Costs Avoided • Not Forced to Borrow Locally • U.S. Interest Rates • 100% Financing of Short-Term Credits

  19. Replace Letters of Credit • L/Cs do Not guarantee payment • L/Cs require expertise • L/C may cost the sale • L/Cs tie up buyer’s funds or credit • Insurance eliminates high local int. rates • Insurance eliminates buyer’s bank fees • Insurance builds customer loyalty

  20. List of Insurers • ACE • AIG • Atradius • Coface North America • Euler Hermes (ACI) • Export-Import Bank of the USA • FCIA • HCC • Zurich

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